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Hedge Funds are now the New Mutual Funds (Oh Dear !)
Slate ^ | 12/27/2005 | Daniel Gross

Posted on 01/18/2006 6:55:12 AM PST by SirLinksalot

Hedge Funds Are the New Mutual Funds Oh, dear.

By Daniel Gross

This was the year of hedge funds. The largely unregulated pools of private capital—generally available only to institutions and the rich—have proliferated nearly as fast as adulatory articles about them. Hedge-fund managers have historically been the Garbos of the asset management world: They want to be left alone by the media, by the public, and above all, by the Securities and Exchange Commission. But in recent years—and especially in 2005—they've had a coming-out party. Aggressive hedge-fund managers are seeking to shake up management and push restructurings at blue-chip companies like Time Warner and McDonald's. Others, not content to flip stocks, have taken the reins at well-known companies, as Edward S. Lampert has done at Sears.

As the chart accompanying this article shows ( SEE : http://money.cnn.com/2005/11/22/markets/hedge_funds/), the hedge-fund industry has doubled in the last four years; there are now an estimated $1 trillion in assets in 8,000 funds. Staid institutions like university endowments and state employee pension funds are plunging cash into hedge funds. And investment banks have rolled out funds that allow merely well-off people to invest in them.

Are hedge funds the next big thing in mass investing? And if so, will they suffer the same lousy fate as the last big thing in mass investing—mutual funds? In the 1990s, the mutual-fund industry doubled. Millions of new investors, lured by excellent recent performance, thronged into funds. Today, according to the Investment Company Institute, there are 8,000 U.S. mutual funds with $8.5 trillion in assets. Yet every year, the majority of them underperform broad market indexes—and charge fees for doing so. It turns out the mutual-fund industry expanded well beyond the ability of mutual-fund managers to run the money effectively.

(Excerpt) Read more at slate.com ...


TOPICS: Business/Economy; Editorial
KEYWORDS: hedgefunds; mutualfunds
In July of 2005, Edward Jay Epstein noted that hedge funds had become a key source of Hollywood financing. In May, Daniel Gross wrote about Carl Icahn and his fellow geezer shareholder activist, Kirk Kerkorian. In 2003, he argued that big hedge fund managers like George Soros could no longer single-handedly move sovereign currencies. In 1999, Paul Krugman wrote about the difficulties faced by legendary hedge fund manager Julian Robertson. In 1998, James Surowiecki weighed in on the failure of hedge fund Long Term Capital Management.
1 posted on 01/18/2006 6:55:13 AM PST by SirLinksalot
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To: SirLinksalot
Hedge funds with trillions leveraged in derivatives are a financial nuclear bomb waiting to explode. Think of LTCM times 1,000. No little group of Fed governors will be able to put Humpty Dumpty back together after it implodes.
2 posted on 01/18/2006 6:58:14 AM PST by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: Travis McGee
Hedge funds with trillions leveraged in derivatives are a financial nuclear bomb waiting to explode.

Is there an English equivalent to that statement???

3 posted on 01/18/2006 7:05:30 AM PST by kipita (Conservatives: Freedom and Responsibility………Liberals: Freedom from Responsibility)
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To: kipita
Don't worry, the talking heads will explain it after it happens. Or just google around the key words in this article, and add LTCM and crash to your key words. You will find plenty of articles about the systemic risk.
4 posted on 01/18/2006 7:29:11 AM PST by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: kipita
Hedge funds with trillions leveraged in derivatives are a financial nuclear bomb waiting to explode.

Is there an English equivalent to that statement???

I think it has something to do with "The bigger the bundle the bigger the bungle." - Tom

5 posted on 01/18/2006 7:48:25 AM PST by Capt. Tom (Don't confuse the Bushies with the dumb Republicans - Capt. Tom)
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To: kipita
Unfortunately no...and that's part of the problem.

Warren Buffett, whose politics I despise but whose investment skills I acknowledge, says he won't buy anything he can't understand. That would preclude hedge funds.

Warren should add another rule to his list..."Don't bet against the US economy." He lost a bundle betting against the dollar.

6 posted on 01/18/2006 8:03:24 AM PST by gogeo
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To: kipita; Travis McGee

As with any investing, never put all your eggs in one basket.

It doesn't make sense to hold a 401 or any other investment that is performing poorly.

Invest with four or five different companies. Locate the three highest performering funds in each company and then buy them using no more than 20 or 25% of your investment capital.

Initially, you won't be able to afford buying into five companies, so buy into two of them. When your assests grow, spread them out with more companies.


7 posted on 01/18/2006 8:55:50 AM PST by B4Ranch (No expiration date is on the Oath to protect America from all enemies, foreign and domestic.)
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To: kipita
LTCM is Long Term Capital Management. It was a huge hedge fund from several years back. Hedge funds buy items and then hedge the risk by buying a counterbalancing item, such as an option. If the price goes up, you win on the item. If it goes down, you win on the option. Either way you win, or so it would be in a perfect world. A computer model helps determine the right price for the options and the proporations of options to actual holdings taking into account things like relative risk.

Trouble was that in the late 90s the Russian economy melted down, and there was a crisis in Asia at the same time. LTCMs models failed and the fund exploded into massive losses. And that meant that many really wealthy investors should have been throwing themselves out of windows, but fortuantely our Government couldnt have that and bailed out the fund with a massive taxpayer funded windfall. LTCM disbanded but there are now hundreds of hedge funds, and if they all blow up simultaneously, a bail out isnt practical. The economy would suffer pretty badly.

8 posted on 01/18/2006 9:56:15 AM PST by pepsi_junkie (Often wrong, but never in doubt!)
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To: pepsi_junkie

Thanks! I understand your English!


9 posted on 01/18/2006 11:43:58 AM PST by kipita (Conservatives: Freedom and Responsibility………Liberals: Freedom from Responsibility)
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